Deal-Making in Power Sector Dragged in 2019
Credit to Author: Sonal Patel| Date: Thu, 23 Jan 2020 14:25:21 +0000
The post Deal-Making in Power Sector Dragged in 2019 appeared first on POWER Magazine.
Deal-making in the North American power and utilities sector fell for the third year in a row in 2019, and total deal value shrank by 41% compared to 2018, indicating a sustained sluggish financial interest in the sector, according to PricewaterhouseCoopers (PwC).
The international accounting firm’s newly released “North American Power & Utilities deals insights Year-End 2019” noted total deal value has dwindled since 2016, a “banner” year that saw $157 billion in total deal value. In 2019, total deal value fell to $43 billion. And compared to 2018, total deal volume decreased by 24% in 2019.
The firm’s 2020 outlook for the sector, however, is optimistic. “We expect to see a continuation of themes in the Power & Utilities deals market in the new year, with yield, access to infrastructure, rebalancing portfolios, and balance sheet rationalization expected to drive deal activity,” it said. “Renewables will remain as one of the key areas of interest for deal makers as federal incentives phase down/out. Emerging technologies, such as energy storage, are expected to have a gaining impact on deal activity. And lastly, with the recent decrease in interest rates, bid ask spreads and valuations may benefit, which could also have an impact on deal activity.”
One indication that interest has heightened is that the fourth quarter (Q4) of 2019 turned out to be the strongest quarter on a deal value basis since the second quarter of 2018. “Q4 witnessed renewed interest from financial investors, accounting for 62% of total deal value for the quarter; renewables continuing to remain a key area of interest, contributing 43% to total deal value for the quarter; and strong inbound deal activity, contributing 62% to total quarterly deal value,” PwC said.
“Financial players returned to the forefront of deal activity, particularly as it relates to deal value with significant available investment capacity finding ample opportunity in the industry and as strategics continue their focus on digestion of previously announced mega deals,” explained Jeremy Fago, PwC U.S. Power & Utilities Deals leader.
During the fourth quarter, the first “mega deal” (of more than $5 billion) was announced: Canada Pension Plan Investment Board said it would acquire Pattern Energy Group Inc. for $6.3 billion, a transaction that is expected to close by the second quarter of 2020. Also notable was DTE Energy’s midstream subsidiary agreement to acquire M5 Midstream, a natural gas gathering system and pipeline in the Haynesville shale formation, for $2.7 billion, and Brookfield Asset Management’s definitive agreement to acquire a 25% stake in Dominion Cove Point LNG (liquefied natural gas) in a transaction valued at $2 billion. “The announcement is part of Dominion Energy’s strategy to establish a permanent capital structure for Cove Point,” PwC noted.
Among other financial trends in the sector PwC highlighted for 2019 are that asset deals beat out corporate deals: asset deals made up 75% of 2019 annual deal volume. Meanwhile, inbound deals—investment by global companies in North America—accounted for 37% of total deal value and 38% of deal volume in 2019.
Over 2019, strategic deals surged ahead of financial investor–driven deals, accounting for 54% of total deal value for the year. In the fourth quarter, however, financial deals accounted for 62% of total deal value, a significant increase compared to the third quarter of 2019, in which financial deals accounted for only 21% of total deal value.
According to PwC, the numbers suggest that “With the changing makeup of the nation’s generation supply, dealmakers remain interested in gaining exposure to gas and electric transmission infrastructure.” It noted that earnings for gas utility transactions have trended upward over time “as buyers have paid premiums for growth opportunities.” Meanwhile, as the industry consolidates, small and mid-cap utilities “have been viewed as potential acquisition targets,” it said.
Interest in electric merchants, however, “continue to set the low end of the range of multiples for sub-sectors within the power and utilities industry, dragged down by concerns including exposure to commodity price volatility and market/regulatory impacts,” it said.
—Sonal Patel is a POWER senior associate editor (@sonalcpatel, @POWERmagazine)
The post Deal-Making in Power Sector Dragged in 2019 appeared first on POWER Magazine.